In 2014, Larry Fink started writing letters to the leaders of some of the largest publicly listed companies, urging them to consider the importance of environmental, social, and governance (ESG) issues.
Fink is the chairman and CEO of BlackRock, one of the largest asset management houses in the world. The firm’s success was rooted in its cost-effective, passive investment products that rely on tracking indices and funds. But Fink wanted his firm to engage with the companies in which they invest and hold them accountable for their social and environmental impacts.
What role should investors play in urging business leaders to take ESG issues more seriously and enforcing compliance? Harvard Business School professor George Serafeim discusses the merits of Fink’s approach, the importance of corporate investments in ESG themes, and how to lead a company driven by purpose and profit in his case, “BlackRock: Linking Purpose to Profit,” and his new book Purpose and Profit: How Business Can Lift Up The World.
BRIAN KENNY: On October 13th, 1972, the CEOs of General Electric, US Steel, and Alcoa announced the establishment of the Business Roundtable. A group comprised entirely of CEOs of large corporations, whose purpose was to promote a thriving U.S. economy and expanded opportunities for all Americans through sound public policies. It was pretty clear from the get go that those policies would by and large support the interests of business. The Roundtable became a powerful lobbying group on Capitol Hill, thwarting antitrust and consumer protection legislation and blocking labor reform all within its first five years. In subsequent decades, they worked behind the scenes in Washington to promote corporate tax cuts and free trade while scuttling legislation that would’ve made corporate boards more accountable. So, with that record, it’s not surprising that the Business Roundtable pledge of 2019 was met with some skepticism. The pledge was signed by 181 CEOs who committed to lead their companies for the benefit of all stakeholders, including customers, employees, suppliers, communities, and shareholders. It was a clear rebuke of the shareholder primacy that dominated business for decades. And it seemed to herald a new day for the role of business in society. But many suspected we might soon return to business as usual. Today on Cold Call, we’ve invited professor George Serafeim to discuss his case entitled, BlackRock: Linking Purpose to Profit. I’m your host, Brian Kenny, and you’re listening to Cold Call on the HBR presents network. George Serafeim’s research focuses on measuring, driving, and communicating corporate performance and social impact. And he is the author of a new book called, Purpose and Profit: How Business Can Lift Up The World. That is a very ambitious title. George, thank you for joining me today.
GEORGE SERAFEIM: Thank you for having me, Brian. We like ambitious things here at HBS.
BRIAN KENNY: We’re going to talk more about your book and the ideas in it. When I asked you to be on the show, I said, “Tell me about a case that will help to surface some of the ideas in your book,” and you immediately gravitated to this one. So, I thought it was a really interesting case. We read so often in the headlines about the misdeeds of people in business. And I think this case raises a lot of those questions to the surface about can business really balance, profit and purpose in a meaningful way. So let’s just dive right in. Why don’t we start with the central theme of the case and what your cold call will be when you have this case in class?
GEORGE SERAFEIM: The central theme of the case, Brian is the letter from Larry Fink, the CEO and founder of BlackRock, to corporate leaders, CEOs of the largest publicly listed companies, asking them about purpose, and the connection of purpose to profit and what is their purpose to articulate that, establish governance mechanisms around that. So what are the implications for the board of directors? And set clear strategic direction in the future and a long term perspective for achieving that purpose. My cold call is actually I put the students in the shoes of a CEO that is receiving one of those letters. And I say, “You have three choices. You get this letter. Does this make you excited, anxious, or frustrated?”
BRIAN KENNY: Yeah. You’re a little ticked off by this letter.
GEORGE SERAFEIM: So, how are you feeling about that? And it’s very interesting, you get a cross section of responses in the classroom. So, some students say, I’m very excited because actually that reinforces how I would run the business, with a strong sense of purpose that actually brings closer to ask customers, motivates employees and so forth. Some students say it’s actually frustrating because it’s not clear what I’m supposed to be doing with this thing. So, this concept of purpose is a fuzzy concept and so forth. And a third set of students that say I’m a little anxious, because it’s not clear what I should be doing. And if I’m not doing that does this mean that my largest investor will vote against my board in the next annual general meeting. So, it’s a mix of feelings in the classroom and it really generates a great discussion.
BRIAN KENNY: Yeah. I have no doubt about that. And for our listeners who aren’t familiar with BlackRock, can you just describe what they do and what Larry’s role is within the firm?
GEORGE SERAFEIM: Definitely. So, if you think about the investment landscape, BlackRock is the largest asset management house in the world. And it became the largest basically asset management house in the world by concentrating on what is called passive investment product. So, most of their products are really tracking indices, widely diversified set of stocks or bonds and tracking those indices passively. As a result, they charge very low fees for those products and they have been exceptionally good at scaling up those products and attracting hundreds of billions and trillions in fact of assets under management. So it has become a very, very successful investor because of in general, the massive, I would say influx of money towards passively tracked indices and fund products.
BRIAN KENNY: And Larry’s role within the firm, he’s the CEO, so he-
GEORGE SERAFEIM: He’s the CEO and the founder. He has been the leader. He has led the organization. And in general, BlackRock has been an exceptionally, I would say, successful firm. If you look at their own stock price performance.
BRIAN KENNY: The advice that he’s giving in these letters is not financial advice. It’s not operational advice. It’s not necessarily what you might think you would get from your largest investor about how to run your business better, necessarily. What are some of the things that he’s saying and why might it make people anxious or a little confused?
GEORGE SERAFEIM: So, he started actually writing letters to the CEOs, if I remember correctly around 2014, 2015. And I think something that he was always worried about is this idea of managing the business for the long term and not actually cutting corners in order to produce increased short term performance, but at the detriment of long term competitiveness. And then he goes on to actually describe this idea that when you actually have a strong sense of purpose inside the organization, that north star might be quite effective at making sure that you stay on the long term track of where the business needs to be and not be distracted by short term noise effectively, that might be coming from different developments that might be going on. So, he’s actually articulating why that sense of purpose is important and that this idea of purpose can be the animating force inside the organization that unleashes is innovation, creativity, and productivity inside the organization. And then thinking about that in connection to societal impact. So how are you actually impacting the external environment around your customers, your employees, the natural environment and so forth?
BRIAN KENNY: Yeah. So he’s telling them to think about it.-
GEORGE SERAFEIM: Yep.
BRIAN KENNY: … He’s not saying here’s how you do it. He’s not giving them a blueprint for how to do it.-
GEORGE SERAFEIM: No. No. No.
BRIAN KENNY: … So that part is ambiguous or left up to the-
GEORGE SERAFEIM: And that is the frustrating part for some people. Because it’s not clear exactly what you do.
BRIAN KENNY: … Yeah. So, how did people react to it? Did CEOs sort of welcome this or what was the reaction he got from the CEOs?
GEORGE SERAFEIM: As the students reacted. Some people were excited. Some people were frustrated, some people were anxious. Because it has real implications actually from a corporate governance perspective. But I think this is also the balancing act that one would need to have. So you’re not telling people exactly what to do, but you’re saying, well, you should explore this idea. And at the very least you should release information about how you are thinking about all of those issues, how you’re managing human capital, social capital, intellectual capital, natural capital, all these forms of capital that increasingly have become really, really important for the competitiveness of organizations.
BRIAN KENNY: Yeah. And we’re hearing a lot about this. This is one example, but it’s in the air. I mean this notion of the role of business and society, how should business be thinking about what they can do to solve big, complicated problems. We talk about it a lot at Harvard Business School. So Larry is sort of tapping into this theme, kind like the Business Roundtable did that I mentioned in the introduction. I mean, do you see this as a movement that has really gained enough momentum to sustain itself? And how do you think CEOs are going to react to that?
GEORGE SERAFEIM: I think it has, but I would put one caveat to that, Brian, which is we need to build accountability structures around that. So, it’s one thing to say that I want to do this. I want, for example, to reduce carbon emissions in my supply chain, or I want to become a more inclusive workplace. I want to improve employee workplace practices and safety or whatever that might be. And it’s another thing achieving that. And I think we have a lot of commitments and aspirations and we have much less accountability about the outcomes that we’re actually achieving. So, I think we’re still in the process of creating that, but to the extent that we’ll be effective at creating that almost like accounting revolution, I would say around accountability of corporate impacts, I think that can become a much more powerful sustaining effort.
BRIAN KENNY: I want to talk about the Goldilocks dilemma, which is a term that you use in the case. Can you describe what that is and how it relates back to the Larry Fink letters?
GEORGE SERAFEIM: That goes back to the business model of BlackRock that we discussed. So, if you think about it, you can have active funds. So then you’re actively saying, I want to buy that stock, or I don’t want to buy that stock. And in those types of funds, you have always the opportunity of exit. You say, I don’t like this company. I won’t to invest in it. Now, if you are actually managing an index fund, you don’t have this option. You actually need to hold this stock. So what that realization over time as BlackRock was increasing its passive business, led to the realization that we need to actually to have the capabilities to engage with companies and the leadership of those comments, because we just don’t have the option of exit. As a result, we need to build the capabilities for voice. And that led to the creation of an increasing number of resources and teams around what is called investment stewardship and asset stewardship. The Goldilocks dilemma is, what do the leaders of the investment stewardship function need to do? Should they be more aggressive with engaging with companies? And that can come at the expense of damaging relationships with management teams that you will be invested for a very long time and so forth. But also, at the expense of your cost structure. The more engaged you are, the more you need to hire people, build cost structure. But that goes a little bit against the business model that we discussed before, which is you have passive funds, you charge very, very low fees. And part of that is retaining a lean cost structure. On the other side, you’re under so much pressure to become more engaged and really understand what is happening in those businesses.
BRIAN KENNY: And the case talks about activist investors. We’ve heard about activist investors, they are a disruptive force within industries, but that’s kind of their purpose, right?
GEORGE SERAFEIM: Well, yes. I mean, that’s what they’re built to be. I mean, that is a very different business model. So, activist investors in general, they charge much higher fees. At the same time, they have much more concentrated portfolios, meaning that they invest in few firms, maybe eight to 10 companies, maybe even less, in some cases. While a typical BlackRock fund might be the S&P 500 fund, which is like 500 companies. So very different business model. So you dig deeper, much deeper into the fundamentals of the companies and you come up with an idea on how to improve the company. So you acquire a big stake in the company, and then you engage with management and say, you need to divest this operation. You need to change this business unit. You need to repurchase shares, whatever that might be. Very different business model.
BRIAN KENNY: Sounds like a nightmare scenario for most CEOs though.
GEORGE SERAFEIM: Sometimes I would say it can be distracting, but sometimes, there are very good and valid points in many of those activist campaigns, because in some cases, companies have been a little bit sleep walking. They’re a little bit too comfortable and sometimes shaking the boat is a good thing as well. So as in everything in life, you can find good activist cases, bad activist cases.
BRIAN KENNY: Right. And I would imagine, we know that over time workplace cultures develop in such a way that sometimes nobody wants to give bad news to the boss-
GEORGE SERAFEIM: Exactly. Exactly.
BRIAN KENNY: … maybe an activist investor, doesn’t worry about that, right?
GEORGE SERAFEIM: Exactly.
BRIAN KENNY: How does a company like BlackRock interact? What’s their relationship with an activist investor?
GEORGE SERAFEIM: It’s a really interesting question. So, in many cases, companies like BlackRock, they’re not activists in the sense that they’re actually trying to force a shareholder proposal, let’s say in an annual general meeting, to change the board of directors or something like that. But actually they will vote during the annual general meeting on such proposals. So from that perspective, if you’re an activist, gaining the support of an organization like BlackRock, understanding why you’re making those requests and then gaining their support and as a result, some of their votes and so forth, can be actually very, very important.
BRIAN KENNY: You’ve been on the show a couple of times before. And we’ve, I think in each instance, we’ve talked about ESG quite a bit. That’s something that you study deeply, and that is a theme that recurs in a lot of your cases. It does come up in this case too and I’m wondering for people who don’t know what ESG is, maybe you can explain that just briefly, but also talk about it in the context of BlackRock and in the context of how asset managers think about ESG when they’re making investment decisions.
GEORGE SERAFEIM: Brian, ESG has become such a, I would say a buzzword. But also it has become unfortunately politicized and there is a lot of misconception around it as well. And I think it’s really important to first define what it means for you. So, for me, what it means, ESG is really about how the world around us is changing – and some of those societally relevant issues are becoming business relevant issues. And then what are the new risks and opportunities that organizations are facing? And ESG is a framework for understanding those risk and opportunities and then measuring impact, analyzing those impacts and then driving performance on improving performance on those impacts and being able to communicate them all with an eye towards competitiveness. I think part of the BlackRock discussion as well is, well, why is BlackRock doing this? And that is generating a great discussion in the classroom about, well, if you actually think about it, and you’re a long term investor, again, because most of your funds are passive funds, you will be investing in those commons for a long time, then you actually care about drivers of long term competitiveness. So, how you’re managing your people, how you’re impacting the natural environment around you, how you’re creating trust with your customers, all of those things are actually important elements of a strategic plan and this long-term orientation of understanding where the organization is going. Now, on the other side of things, though, you need to be careful because a classic problem that you might be facing is that you might have a management team that might say, tomorrow, tomorrow, we’ll be better tomorrow, three years from now, five years from now. And actually the performance in the short term and medium term might de deteriorating. And they might be using that as an excuse for what is going to happen in the long term. So it’s all about this balancing act when you are trying to keep one eye on the microscope while keeping on the other eye on the telescope if you will.
BRIAN KENNY: Yeah. And I think we’ve always said that ESG is good for business. You don’t do it for altruistic reasons. It’s not about altruism. And people talk about greenwashing and those terms come up quite a bit. But what you’re saying, it sounds like is that companies who invest in these areas and think about them strategically perform better over the long run.
GEORGE SERAFEIM: Yeah. I mean, if you think about it strategically, and that is always, I think ESG as any other management concept, I would say, you can do it bad or you can do it well.
BRIAN KENNY: Sure. Yeah.
GEORGE SERAFEIM: And I think you will find that some management teams are probably destroying value through ESG and some management teams are creating value through ESG. And I think if you take a step back and you say, well, how can I actually understand the fact that I’m using different types of resources? And then the outcomes that I’m generating from the use of different types of resources and how that is fitting into my competitiveness. Where the world is going, where markets are going and what do people want actually.
BRIAN KENNY: I’m wondering if there are leaders of other firms, other asset management firms who have taken an approach similar to what Larry’s done.
GEORGE SERAFEIM: Well, it has actually become part of the competitive field, Brian, which is actually quite interesting. So what started from a niche part of the asset management market over time has become, I would say pretty standard in the asset management space, so that everybody’s actually having an ESG strategy. Everybody’s having an ESG policy. Everybody’s having ESG disclosures. Now the question is how good those are? Well, there you will find a lot of differentiation and some investors are actually viewing ESG really as a compliance exercise while other people are viewing actually ESG as an innovation exercise. Again, trying to understand how they can collect new forms of data that allow them to have a better informed opinion about management quality and business model quality.
BRIAN KENNY: Yeah. Yeah. I usually ask in the beginning of the conversation and I didn’t today, but I want to circle back to it now with your book in mind. I always ask why faculty choose to write a particular case? What sparked their interest in it? How does it relate to the scholarship that they think about? And in this case, I would ask you that, but also say, why was this the perfect case to surface the ideas in your book?
GEORGE SERAFEIM: Because the Goldilocks dilemma, Brian is something that is chasing all of us in pretty much everything that we do in business and really in our lives. Anytime that you’re doing something new, the question is, am I doing just the right amount? Am I overdoing it? Am I moving too fast, too slow? What is going on? And this is something that we discuss a lot also in the classroom, meaning that when you’re doing something around… And that in this case might be around ESG, for example. If your agenda is going to be driven by external pressures, that might be telling you’re not doing enough, you should be doing more, or the opposite that you should be doing less, and you actually don’t have a good understanding, you’re not a master of your craft. You haven’t developed the technical skills to really have an informed opinion about and a strategy about what you should be doing. You will probably end up falling into a trap where you will be doing either too much or too little.
BRIAN KENNY: So, you can have too much purpose at the expense of profit or too much profit at the expense of purpose? I’m just trying to-
GEORGE SERAFEIM: Yeah, yeah.
BRIAN KENNY: … Yeah.
GEORGE SERAFEIM: Absolutely. And it can be a balancing act. So how are you be thinking about that? So in this case of this specific case, it’s about how much should you engage with management teams and how many resources you should allocate and then really granular also decisions such as for example, is it the same thing if you’re engaging with companies in Japan versus the U.S.? Are you asking the same things? Does the local context matter? How much of the resources need to be humans versus artificial intelligence and technology as part of the engagement process and how you’re screening for companies and so forth, or how much you’re relying on internal resources versus outsourcing some of that expertise to proxy advisors and so forth? So, all of those choices become something. And for me, that is also something that is embedded in the book. Actually, I start the book with a success case and a failure case, to really illustrate this idea that actually to drive a purpose driven organization, to build and drive forward an organization that is filled with purpose, and that has this animating spirits of purpose, it’s actually not easy. And in many cases, leaders that have done that, they have assumed both personal risk and organizational risk because they’re trying to do something new. And every time that you’re doing something new, because it’s differentiated, many people will view it with skepticism, whether that is a new product, a new way of competing, a new way of attracting talent. So, actually looking at it from the perspective of how the world is evolving and then what is the toolkit that a leader needs to have in order to be able to do something different, but in a way that’s successful at the end, is something that is really important as part of the book.
BRIAN KENNY: Well, let me ask you this, where does purpose come from within an organization? Well, I’ve done cases here about leaders who had a purpose and they’ve founded an organization based on what their own sort of individual purpose was. At Harvard Business School we have a mission here to educate leaders who make a difference in the world. That’s kind of our purpose as I see it. But where does the purpose emerge from within the firm?
GEORGE SERAFEIM: It’s a really interesting question because actually one of the things that we have found as part of our work is that it involves both a top down process and a bottom up process. What do I mean by that? Certainly the role of the leader is very important. In general, in companies that you have purpose driven leaders that can clearly communicate and create also the right incentives and clarity around that purpose is really, really important. But another piece that we have found is that in most organizations, what you’re observing is that in general, senior executives tend to feel a strong sense of purpose. But then when you go to the middle management layer, for example, that sense of purpose declines pretty significantly. So, most organizations have a real diffusion problem when it comes to purpose across the hierarchy. And as a result, one of the things that we have found is that the more you’re making the job meaningful, and you’re creating clarity about how the work that people are doing is actually feeding into that purpose, the more credible and authentic becomes the idea that your job really has an impact. And I think here at Harvard Business School as well. So, we have people doing very, very different things, but I can tell you one thing that is for sure true that the fact that I can be effective in the classroom is a function of the job that many staff are doing. So, the fact that I can be effective in the classroom, and then we create leaders that make a difference in the world is a function of the work that so many people have actually done.
BRIAN KENNY: Yeah. Yeah. And there’s an army of people behind the scenes here who-
GEORGE SERAFEIM: Absolutely.
BRIAN KENNY: … who do everything to make this place run the way it does. And then let’s just talk about the profit piece of it for a minute, because nothing is sustainable without profit.-
GEORGE SERAFEIM: Absolutely.
BRIAN KENNY: … Business exists to make a profit. And I would just like sort of your take on how to balance those two things a little bit.
GEORGE SERAFEIM: And that’s why I put it on the title, Brian, which is “Purpose and Profit.” Because the fundamental idea is the following that if you’re actually trying to have more positive impact on the world by driving your purpose, that is not sustainable from the perspective of durability or scalable, if it’s not profitable. The way that you’re actually having more positive impact on the world is when you’re creating solutions that are durable over time. So, you’re not doing something that then in the next recession you’re dropping and also something that it’s scalable and as a result, it can reach more people. And something that I say to the students every time in the classroom is this idea that actually there is only one certain way that you’re not going to have positive impact on the world. And this is by burning the organization to the ground. If you are actually a bad manager, a bad operator, that is the one sure way that you’re going to have a negative impact. So you have to drive a competitive organization forward and you need to be able to balance that purpose and profit. Otherwise, I think anytime that this can be imbalanced, you might be able to actually to get into a situation that you destroy both.
BRIAN KENNY: Yeah. Yeah. Is this a new phenomenon? I’m asking that because if you think about, I mentioned the Business Roundtable in the beginning, founded back in the 1970s by these mega corporations, it seemed like there was a time where business didn’t have to worry about purpose so much. They could just bang their products through and push them out and people would buy them. But today it feels like people are a lot more concerned about who they’re buying from, what that firm stands for and what it’s purpose is.
GEORGE SERAFEIM: This is the first part of the book, Brian. And really it makes the case that the world has changed fundamentally. And one of the biggest drivers of that change has been technology. Technology has created two elements. The first one is transparency. The world is much more transparent than it used to be because just think about the very simple fact that 30 or 40 years ago, you had really no idea what was happening in the supply chain of a company. Now, guess what, you have an iPhone, you take a picture, you put it on Twitter, 10,000 retweets later, here we are. So transparency is one thing. The second thing that it has created, has created fundamentally much more choice. Let me give you again a very simple example. Imagine 40 years ago you were sitting in Boston and you wanted to find an employment opportunity in San Francisco or in Idaho, wherever. How? It was actually really difficult. Now you go on LinkedIn and Indeed, and you say, wow, I can actually find. So, that has created choice at the employment level, but also it has created much more choice at the product market level. I give the story in the book where growing up in Athens I would go to the local deli and there was no really question about what kind of milk I wanted. There was only one milk, that was about it. Now you go to the supermarket, there are 50 different kinds and oat and almond and this and different brands and some of them are certified. So, there’s a lot more choice that has been enabled. So, when you couple those things together, transparency and choice that has been created by technology, you get another element which is voice. So, increasingly more consumers and more employees have voice about what they’re expecting from a company. And now, when you couple that voice with the idea that because the economy has changed and much more of the value of companies now relies on their trust that they have on the basis with consumers and so forth on their human capital, on their intellectual capital it creates a really dynamic environment where that voice actually is increasingly affecting the value and as a result, the competitiveness of companies.
BRIAN KENNY: Yeah, that’s really interesting. And I think it’s indicative of just how difficult it is to be a leader today in business, and to have an organization that can thrive and sustain over time.
GEORGE SERAFEIM: Instead of difficult, I use another word Brian, I say interesting. It has become more interesting.
BRIAN KENNY: That’s a euphemism. This has been a great conversation, George. I just want to ask you one more question before we wrap it up. And that would be, what’s one thing that you want listeners to remember both about the case, but also about your book?
GEORGE SERAFEIM: It’s really about this balancing act. We’re all always as business leaders, but also as individuals in situations where we have to make a choice. And sometimes we might be a little bit too fast. Sometimes we’re a little bit too slow. Taking a step back and getting it exactly right can make all the difference between success and failure. So, I welcome everyone to think about their own individual circumstances and think about this Goldilocks dilemma and to really have the time to reflect, maybe communicate with colleagues, get ideas, get opinions, and reflect on how they can get it just right, which is always difficult. But sometimes we urge to make a decision without thinking about the full set of implications.
BRIAN KENNY: George Serafeim, the book is called Purpose and Profit: How Business Can Lift Up The World. Thank you very much for coming on Cold Call to talk about it.
GEORGE SERAFEIM: Thank you very much, Brian, for having me.
BRIAN KENNY: If you enjoy Cold Call you might also like our other podcasts: After Hours, Climate Rising, Skydeck, and Managing the Future of Work. Find them on Apple Podcasts or wherever you listen. Be sure to rate and review us on any podcast platform where you listen. If you have any suggestions or just want to say hello, we want to hear from you. Email us at coldcall@hbs.edu.Thanks again for joining us. I’m your host, Brian Kenny, and you’ve been listening to Cold Call, an official podcast of Harvard Business School, brought to you by the HBR Presents network.
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